It’s no secret that, as Australians, we absolutely love property!
Across the country, property investing is one of the most popular options for everyday Aussies looking to increase their wealth and secure their financial future.
Research shows that an astounding 56.7% of total household wealth in Australia is now tied up in residential property.
Of course, for those of you looking to invest in property – whether it’s your first property or your tenth – it’s always important that you have a foundational understanding of the process involved in buying an investment property.
This is particularly true when it comes to financing your investment property.
The reality is that navigating the landscape of investment property financing can be daunting – especially if you’re a first-time investor – and there are several things you need to know and consider along the way.
Fortunately, with all of our team’s expertise in this, we can help.
That’s why we’ve put together this comprehensive
guide to investment property financing.
By working to demystify the financing process, we’re aiming to empower you to gain a better understanding of each step on your investment journey – hopefully helping you achieve your investment goals and get you on the path to enjoying complete financial freedom.
Sound good? Great. Let’s get started.
A quick introduction to property investing in Australia
Before we get started on some investment property financing strategies, let’s take a quick step back to refresh our memories on what property investing is and how it works.
What is an investment property?
An investment property refers to any kind of real estate – residential or commercial – that has been purchased with the lead intention to generate income for the investor and/or increase the value of the capital amount they’ve invested.
Unlike an owner-occupied property, the owner of an investment property does not live there – instead, renting it out to a paying tenant or, in some cases, holding onto the property in a vacant state until a good opportunity to sell comes around.
How do investment properties work?
As mentioned above, investors in Australia typically purchase an investment property in a bid to generate or increase their wealth. This can be done both by collecting a rental income and waiting for the property’s value to increase so they can either access the equity to invest further or sell for a profit.
In fact, many investors follow both strategies to help them reach their goals more quickly.
Of course, when it comes to property investing, there are also several incentives and benefits that make it a far more attractive practice than other forms of wealth creation – which we will discuss later on in this guide.
However, as important as understanding how investing works when looking to purchase a property, equally as important is ensuring you have a firm grasp on the finer details of the Australian property market.
Understanding the Australian property market
If you already follow the property market at all, you’ll know that it can be an extremely dynamic beast.
It’s always fluctuating. You’ll hear all about booms and stagnation, recessions, bubbles, micro-markets and more.
There are many different aspects, both in Australia and on a global scale, which can have a major influence on the growth and decline of the property market.
This means that, if you want to be a smart investor, it’s important to make sure you’ve always got your proactive finger on the pulse.
What you need to know before investing in the property market
If you want to be able to navigate the property market with confidence, there are several things you need to keep on top of, including, but not limited to:
- Current market trends – make sure you’re aware of movement in important figures such as property prices, rental yields, vacancy rates, immigration numbers and population growth in the Australian market.
- Local market conditions – the property market varies greatly from state to state and city to city. Localised factors, such as the economy and existing infrastructure, as well as migration patterns and job opportunities, can all have a major influence on the investment potential of a particular area.
- Laws, policies, regulations and any other important decisions that may directly or indirectly impact property investing or rental agreements in your desired area.
What’s the best way to stay across the Australian property market?
The answer is simple: Do your research – and lots of it.
Keep up with the latest property news, listen to what the experts have to say and regularly engage with the right people – including real estate agents and specialist property advisors – to help you stay across the market as best as possible.
Now, it’s time to discuss one of the most important elements when it comes to purchasing an investment property: Property Financing.
Preparing your finances for buying an investment property
Before starting your property investment journey, the first thing you need to do is assess your financial health to determine your ability to invest, as well as what impact this will have on your financial situation moving forward.
Things to consider at this point include:
- Your income and financial stability
- Any existing debts you may already have
- Your credit score and the factors that influence your score
Another thing that’s critical to ensure is that you can still meet your existing financial commitments in the event of any unforeseen circumstances.
To do this, the best thing to do is to draw up a budget.
Why drawing up a budget is crucial to your investment success
Without a budget, you’ll struggle to understand exactly where your money is going and whether you have the financial capacity to continue to support your lifestyle while building your investment property portfolio.
Take the time to factor in all the costs you can think of that are associated with an investment property, such as the deposit, conveyancing fees, ongoing mortgage repayments, insurance, maintenance costs and more.
Be realistic with your cost estimates, and don’t forget to factor in your daily expenses away from your investment property to make sure you’re not leaving yourself short.
Of course, this is only general advice. It’s always best to speak with an expert in the financing of investment properties to achieve the most accurate budget and cost estimates.
Before we move on, here are a couple of common questions that many first-time investors have about financing their investment property:
How much of a deposit is required for an investment property?
There is no single answer to this question, but in general, most finance lenders will ask for a minimum of 20% of the property’s asking price as a deposit.
In some cases, you may be able to pay less than a 20% deposit, but you will typically have to pay Lender’s Mortgage Insurance (LMI) as part of this, which is an insurance policy for the lender that protects them if you’re no longer able to service your loan for your investment property.
Keep in mind: your deposit does not include any other additional costs, such as stamp duty or legal fees.
If you own other properties though, you may be able to access the equity in that property to use as deposit and costs for your next investment property, meaning no additional cash is required. An experienced mortgage broker or property investment advisor can provide you with some guidance on how this works.
Do I need an income to get an investment property loan?
Yes, you do need an income to get investment property financing in Australia.
This is because you need to be able to prove that you can make the loan repayments, even if you intend to have your rental income cover your mortgage.
The reality is, that without a verifiable income, you will struggle to find a mortgage lender that will offer you any financing options.
Speaking of, let’s explore the financing options for an investment property that are available to you.
Exploring your investment property financing options
When it comes to financing your investment property, there are a few different loan options that you might come across, and the suitability of each will vary depending on your unique situation.
Interest-only Loans
When you take out an interest-only loan, you will initially only have to pay the interest on the loan amount for the first 1-5 years of the loan period.
Once the interest-only period has elapsed, you’ll then revert to paying back both the principal and the interest on the home loan for your investment property – meaning your repayments will typically increase significantly after that interest-only period ends.
This type of loan is particularly favourable for investors looking to buy and sell an investment property in a short time frame to achieve capital gains.
In other words, they intend to sell the property for a profit within the interest-only period of the loan, meaning they won’t need to worry about paying back any of the principal amount, and they can keep their repayments down for the time they own the property.
Principal-and-Interest Loans
As the name suggests, principal and interest loans are designed to have both the principal amount and the interest paid back from the outset.
Unlike an interest-only loan, your initial repayments will be higher from the beginning, but on the plus side, you will be chipping away at the principal as you go.
Depending on your financial situation and investment strategy, this loan option may be more favourable – particularly if you intend to hold onto your investment property for the long term.
Using the equity from an existing property
This is where you can use the equity you’ve built up in one or more of your existing investment properties to secure a loan to pay for your next investment property.
You can calculate the equity you have in a property by taking its value and subtracting the amount you still owe on the loan you took out to purchase it.
This is a popular option for investors who already have a healthy property portfolio and are looking to add to it sooner rather than later.
A quick word on interest rates
It’s worth noting here that both interest-only and principal-and-interest loans can have either a fixed or a variable interest rate.
A fixed rate loan means the interest rate will be fixed for a set period at the start of the loan, typically between 1-5 years. This can help keep your repayments down, particularly in a market with steadily increasing interest rates.
On the other hand, a variable rate loan means the interest rate will fluctuate in line with the standard interest rate set by Australia’s central bank.
Again, each of these options will have their advantages depending on your unique situation, and it’s worth discussing this with your lender, financial professional or property advisor before making your final decision.
Now, let’s run through the loan application process to give you a clear understanding of what you need to do at each step.
Navigating the loan application process
Applying for a loan for your next property can be an exciting, albeit overwhelming time in your investment journey.
That’s why it’s important to have a detailed understanding of how the process works so you can be well-prepared and give yourself the best chance of a successful outcome.
How does getting a home loan for an investment property work?
Once you’ve assessed your financial situation, drawn up your budget and done your research on the different types of loans available, you may then choose to apply for pre-approval (note, this step is not always necessary depending on your personal financial circumstances).
Pre-approval is where a lender will conditionally approve you for a loan amount based on your financial information – providing you with a clearer indication of your borrowing capacity so you can begin your property search.
Once you’ve found a property that you believe is a smart real estate investment, you can begin the formal loan application process.
At this stage, you’ll need to provide your lender with documentation to prove your income and financial situation, as well as key property details so they can conduct their own valuation of the property (including potential rental income and other relevant expenses).
If the lender is satisfied, they will formally approve your investment property financing, allowing you to move forward with your offer and prepare to settle the property transaction.
Common pitfalls to avoid when seeking loan approval
There are certain things you should be aware of when applying for investment property financing to ensure you can enjoy a smoother approval process:
- Don’t overestimate your borrowing capacity – keep in mind that factors like your financial situation or interest rates could change, and you need to be able to show you can handle these changes over the life of your loan.
- Avoid late payments and large amounts of debt where possible – this will impact your credit score and potentially hurt your chances of approval.
- Steer away from making significant employment changes or financial commitments immediately before applying for a loan – your lender will be looking for stability in your financial position.
- Ensure your documentation is thorough and accurate – this will help to speed up the process and avoid delays or frustrations with your lender.
In doing so, you’ll give yourself the best chance of a successful application and be well on your way to building your investment property portfolio.
Government policies and incentives for property investors
Here in Australia, the government has introduced a number of key incentives designed to encourage property investors to enter the market.
We’ve listed these below to help you understand how you can invest in a way that may be more beneficial to you.
Negative gearing
In a nutshell, the Australian government’s policy on negative gearing allows property investors to claim any losses on their rental property and offset them against their taxable income to reduce their tax bill.
As an example, if the rental income on an investment property does not cover the costs of the investment, such as mortgage repayments and other property-related expenses, the owner can claim this difference as a loss on their investment and reduce their taxable income for the financial year.
Capital Gains Tax (CGT) discount
The Australian Government’s CGT discount policy is another great way to help property investors save on their investments.
While any asset purchased for investment is subject to Capital Gains Tax upon selling for a profit, assets that have been held for more than 12 months – including property – are eligible for a 50% discount on the amount of tax paid.
The government implemented this scheme to help promote long-term investment in the market.
Other property-related incentives you should be aware of
It’s worth noting here that while state governments do offer other incentives, such as the First Home Owner Grant or stamp duty concessions, these cannot typically be taken up by property investors. However, they do help to stimulate the property market, potentially helping your investment property to appreciate in value.
As always, it’s best to speak with your financial specialist or property advisor to better understand how these policies and incentives can apply to your unique situation to help place you in the best financial position.
Popular strategies for property investing in Australia
When it comes to building a strong property portfolio, there are several investment property financing strategies that many investors employ to help them better achieve their goals.
Below, we’ve outlined a few of the most popular to help you understand the different options available on your journey.
Refinancing
Refinancing is where an investor essentially replaces their existing mortgage with a fresh loan.
Oftentimes, this is done to help get a lower interest rate or alter the conditions of the loan to become more favourable to the investor and free up their cash flow – potentially making it easier for them to grow their portfolio.
Leveraging existing equity
As we mentioned earlier, leveraging equity is where an investor uses the value of their existing property to help secure additional financing so they can invest in more property and build their portfolio.
Many investors use this strategy to grow their property portfolio quite quickly, however, there are certain risks involved in leveraging equity – such as increased exposure to downturns in the market – that should be discussed with an expert advisor.
Building a property portfolio through ‘Rentvesting’
Rentvesting is the term used to describe an investment strategy where the investor pays rent to live in one property while owning an investment property in another location.
This allows the investor the opportunity to break into the property market and secure a property with great investment potential without having to be tied to that location – especially if it’s in an area they don’t necessarily want to live in themselves.
For example, an investor who lives and works in the Sydney CBD may not be able to afford to buy a property in Sydney, but they may not want to give up living in the city.
Through Rentvesting, they can continue to rent in Sydney while buying an investment property somewhere else, in a growing market, where they can enter the property market sooner and start to build their portfolio and wealth without compromising on their lifestyle.
Of course, while these investment property financing strategies may work for some investors, it’s important to consider your unique financial situation and investment goals before deciding on the right strategy for you.
Just remember to consider the risks too
Of course, while these investment property financing strategies may work for some investors, it’s important to consider your unique financial situation and investment goals before deciding on the right strategy for you.
As with any investment strategy, there are always certain risks involved.
It’s important to understand these risks and feel comfortable with the level of risk you’re willing to take.
The best way to do this is to seek professional investment advice from a property expert who can outline all the risks and advantages of each investment strategy to help make your decision as easy as possible for you.
Financing and purchasing an investment property in Australia can be daunting, but it doesn’t have to be.
As you can see, there are numerous elements that go into successfully financing an investment property.
But more than just the finance itself, it’s also important to take stock of your financial position and ensure you have a clear understanding of the property market before diving right in.
There are also several loan options available to consider, and you need to ensure you’re fully prepared to provide your lender with everything they need to make an informed decision and hopefully grant the approval you’re seeking.
Once you’ve done that, there are then various investment property financing strategies and government incentives for you to consider throughout your investment journey.
Of course, while all this may seem daunting, there are expert property investment advisors available who are ready and willing to help you make the right decisions so you can achieve investment property success.
Do you need help securing investment property financing?
At inSynergy, our expert team is here to help you.
inSynergy is a full-service and specialist Property Investment Advisory firm dedicated to helping you learn how to use property investment and finance as a tool to build a more secure future.
We provide our clients with a broad range of professional services designed to assist with all aspects of property investment, including property investment education, property investment strategy, finance and mortgage broking, and sourcing high-growth investment properties.
Through every interaction with you, our focus is on helping you to safely build a successful property portfolio and achieve your financial goals without sacrificing your lifestyle.
Get in touch with us today to discover how inSynergy can help you on your investment journey.
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Please note, that this article and the information in it is general and not to be considered as financial advice. However, you can book a meeting with us for personalised advice tailored specifically to you.